Brent sheds election-driven risk premium – ING

Softer fundamentals and weakening timespreads have accompanied a sharp sell-off in ICE Brent following the Democrats’ sweep of the US midterm elections, according to ING analysts Warren Patterson and Ewa Manthey. Markets are pricing in a potentially earlier end to the Iran war and a diminishing risk premium. Although US product inventories remain tight, the analysts judge the pace of the recent fall to be excessive.

Oil risk premium expected to decline further

"Oil markets sold off aggressively yesterday, with ICE Brent settling 8.7% lower on the day and below $95/bbl. Selling pressure has only continued in early morning trading today. The outcome of the US midterm elections, with the Democrats winning both the House and Senate has increased hopes that we could see a quicker end to the war in Iran."

"In the absence of escalation, the oil market is likely to continue to slowly give back the risk premium it built in recent months, with oil flows from the Persian Gulf holding up well. This risk premium could disappear even quicker if there’s some sort of agreement between the US and Iran. Fundamentally, the oil market is looking increasingly softer, reflected in the weakening in the physical market as well as timespreads."

"Inventory data from the EIA yesterday showed that US commercial crude oil inventories fell by 865k barrels over the last week. When including releases from strategic reserves total crude, inventories fell by 1.26m barrels. Meanwhile, changes on the refined product side were even more supportive, particularly for middle distillates."

"Despite refineries increasing their utilisation rates by 1.7 percentage points over the week to 94.5%, distillate fuel oil inventories still fell by 3.57m barrels. This took total distillate stocks below 100m barrels for the first time since 2003. Gasoline inventories also edged lower by 222k barrels."

"How all this plays out is still highly uncertain. Therefore, the degree and speed to which the oil market has sold off seems to be overdone. One would think Trump might want to come away with some accomplishments from this war."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)